The key difference between reporting regular staff labor and contract labor, as part of the Medicare wage mix, according to Julia DiFrancesco, is that "Dollars are typically easy to determine from the general ledger or accounts payable systems. Hours are more difficult unless the hospital has some type of automated system where contracted personnel hours can be tracked. For most clinical contracted labor, the hours are typically evidenced on the invoice. However, if the hospital does not have an automated system, the hours from the invoices must be summarized manually."

DiFrancesco is a principal in the Health Sciences Advisory Services (HSAS) Business Unit at Ernst & Young. She explains that the practice specializes in Medicare reimbursement, complete revenue cycle analysis, managed care reviews, finance, and operational efficiency with a national team of about 50 people that are specifically trained to provide wage index services to clients. Those services range from high-level reviews of wage data to detailed audits and/or preparation of the submitted wage data. DiFrancesco specializes in Medicare reimbursement and is currently the national leader for the firm's Medicare wage index services.

She adds that historically, only contract labor that was directly related to hands-on patient care could be reported for wage index purposes. More recently, the Center for Medicare and Medicaid Services (CMS) has instructed that non-patient related contract labor reported in the Administrative & General (A&G), Dietary and Housekeeping cost centers should also be included in the wage data as well.

The key is the ability to determine dollars and hours. For most clinical contracted labor, the hours are typically spelled on the invoice," according to DiFrancesco. "If the hospital does not have an automated system, the hours from the invoices must be summarized manually. For the A&G, Dietary, and Housekeeping contracted labor, most commonly, there will not be hours on the invoice. In this case, the hospital will need to go back to the vendor and request the actual hours to match the invoiced dollars paid.

"The hospital also will need to determine and eliminate any out-of-pocket expenses, such as travel, supplies, equipment, etc. from the total dollar amount claimed. A sample of the types of non-patient related contract labor that can now be included are any consulting expenses, legal fees, tax preparation fees, financial statement audit fees, etc," adds Dan Silver, Vice President at R-C Healthcare Management Services, Inc., in Phoenix, AZ. Silver conducts wage index reviews for hospitals--validating their S-3s as filed in order to optimize the final result. The firm conducts what it calls intensive internal audits of the cost report-the sections that specifically pertain to contract labor--wage index prior to the outside audit by the Medicare Fiscal Intermediaries (FIs).

By 2011, these "intermediaries" will be replaced by Medicare Administrative Contractors (MACs). CMS plans to award 19 MAC contracts with 15 of these contracts to insurers that will cover the majority of hospital (Part A) and physician (Part B) services. However, currently, each intermediary and carrier has jurisdiction to create their own independent coverage policies in cases where a national coverage decision does not exist. The level of evidence required for a positive coverage decision varies by insurer.

Silver adds that providers typically pay for contract labor as invoices are submitted -vendors typically submit invoices weekly, biweekly, or monthly and may or may not detail worked hours as the unit of service. "This is in contrast to documenting internal payroll which is paid to employees by the hour and documented through standard management reporting. Another problem is that some vendors don't use standard invoices. They may include precisely those non non-labor expenses, travel, legal [or court fees] that are sure to be disallowed and have to be removed prior to submission."

Dealing with Omissions Wholesale

DiFrancesco and Silver agree that one of the key reasons for making sure contract labor is recorded accurately and reported scrupulously is because much is left up the FI and often in cases where there is any kind of question about the viability of the labor, the entire contract amount is disallowed. According to DiFrancesco, "generally speaking, nothing should be estimated. Dollars and hours must be supported by actual invoices or other legitimate source documentation. However, in some cases, I have seen FI's accepting estimates if there is a logical and supportable method to the estimation." She says unfortunately, however, FIs also often do disallow the entire contract amount if they question a small part of it.

Silver adds that a key problem with the system is that there is "not a lot of consistency in the process. Much of it has to do with policy and interpretation. FIs have a lot of discretion and authority to determine what is adequate. Much of what they do is discretionary." He notes that providers can arm themselves for the vagrancies by submitting what is reasonable and cost-effective to challenge it. "If the documentation has not already been sent to a storage warehouse, for example, assess what's involved in retrieving it. If reimbursement in the situation justifies the expense and effort of retrieval, it's best to undertake it."

Documenting Carefully and Pre-Empting Reporting Challenges

DiFrancesco and Silver offer strategies providers can employ in advance to assure that their Medicare contract reports will be not be challenged or disallowed by the FI. Silver recommends:

  • Focus on larger vendors whose work is more readily documented.
  • Always have on hand at least a few average invoices for each vendor.
  • Delete non-reimbursable expenses in advance of filing.
  • Have strong estimates with real invoices to back up report.
  • Work with FI to determine what will be acceptable.

DiFrancesco recommends a few additional actions:

  • Keep clear, concise supporting documentation--This will usually take the form of actual paid invoices with hours evidenced on the invoice. The hospital will want to provide a clean summary of the dollars and hours and indicate that invoices are available upon request. Most FI's won't want copies of all invoices, but will request a sample during audit.
  • When hours are not indicated on the invoice, a letter from the vendor with the actual hours or possibly some other form of solid, auditable supporting documentation.

If good intentions go astray, Silver reminds providers that each situation will be decided on a case-by-case basis. Hospital and other providers who feel the FIs have been too stringent in their assessment of the contract labor's viability can appeal to the Provider Reimbursement Review Board (PRRB), an Administrative tribunal appointed by Congress to adjudicate disputes related to provider Medicare issues. It is an independent panel to which a certified Medicare service provider may appeal if it is dissatisfied with a final determination of its fiscal intermediary or the agency's FI. A hearing before the PRRB is widely considered the court of last resort as a decision of the Board may be only be affirmed, modified, reversed or vacated and remanded by the CMS Administrator.

He also reminds hospitals that both the FIs and the PRRB are simply conducting 'a sampling.' "If the company believes there is benefit in going through the effort of challenging an FI's decision with the PRRB -at the very least it's prudent to have a handful of invoices on file for each vendor."

Silver also notes that it's worthwhile to make the effort to document contract labor better from the beginning. "At the very least document it by vendor and by department, work with an auditor to make sure that you're providing what it will take to shepherd the claim throughout the reimbursement process."

Unsupported and Unallowable Contract Labor Costs

The "Medicare Provider Reimbursement Manual," part II, section 3605.2, states that if a hospital cannot accurately determine the number of hours associated with contract labor services, it must exclude all of the contract labor salaries and hours from its wages. Furthermore, the section specifies that contracted services at a hospital include amounts paid for services furnished under contract for direct patient care and do not include costs for equipment, supplies, travel expenses, and other miscellaneous or overhead items.

See the full explanation at


More on reporting Medicare contract labor...

Publication Date: Wednesday, January 07, 2009